Accounting and Finance, ecommerce

What is Affirm? Understanding Purchase Financing

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Affirm loans are a short-term loan option for financing purchases at the time of sale, with a simple application and no hard credit check.

Affirm is one of the new wave of companies offering point of sale loans to finance purchases. Retailers like ticketing service Eventbrite, retailers Wayfair and Casper, and travel site Expedia offer point of sale financing. Essentially, when a consumer checks out on a website, they have the option of paying by taking out a loan from Affirm for the amount of their purchase.

Financing at the time of purchase is growing in popularity as Millennials reject traditional credit cards and loans due to seeing their parents struggle with debt. According to the FDIC, this type of personal loan has gone up nearly 30 percent since 2012.

In this article, we’re going to explore Affirm loans, learn how they work, and discuss the competition and alternatives.


Who Is Affirm?

Affirm is a San Francisco-based consumer lending startup that leverages technology to put a new twist on a classic service. Basically, Affirm enables “buy now, pay later” for all types of online purchases. From a consumer perspective, it’s similar to the Bill Me Later feature of PayPal Credit. In fact, the company was founded by computer scientist Max Levchin, who helped develop PayPal with Peter Thiel.

CNBC spoke with Levchin about Affirm in this video from 2016:

The company was started in 2012, and by 2015, it raised over $275 million in Series B funding from investors. As of 2018, it raised $620 million in venture funding and $100 million in venture debt. This funding helped the company originate over $1 billion in point-of-sale loans in 2017 alone.

Affirm loans are made by Cross River Bank, an FDIC-insured bank chartered in New Jersey.

The Loans

Consumers only take out the amount needed to cover the purchase they’re making. Affirm offers installment loans in amounts from $100-10,000 for 3 to 18 months with an APR between 10 and 30 percent for consumers.

In some cases, Affirm offers 0% financing with what it calls “partner stores.” The company also offers an APR calculator on the section of its website for business owners. The calculator lets you input numbers to see what your customers will pay.

Differences Between Affirm Loans and Credit Cards

If it sounds to you like short term Affirm loans aren’t really different than credit cards, you’re partly right. The main difference is that Affirm loans aren’t a revolving line of credit, unlike credit cards. When you sign up for a credit card, the card issuer assigns a credit limit and can spend up to your limit without additional approvals. You can use your card for one large purchase up to your limit, or for many small purchases.

With Affirm, you’ll take out a loan for the exact amount of your purchase. Therefore, Affirm needs to approve each individual loan purchase you make. Affirm also has the ability to deny your loan request. In some cases, Affirm may approve you for one loan and deny you for another.

Offering Affirm Loans as a Business

In order to offer Affirm for purchase loans, businesses must sign up with Affirm. For every loan, Affirm will charge your business 2 to 3 percent of each transaction, depending on the size of the transaction. This is in line with some online payment services, though it may be more expensive than others. (PayPal, for example, charges 2.9 percent, plus $0.30 for each online transaction, while a competitive interchange plus processor may come in with an effective rate closer to 2.3% -2.5%.)

However, there’s no reason that you can’t offer both Affirm loans and the option to pay by credit card. If you’re looking for a processor with the lowest costs, be sure to try out CardFellow’s free quote comparison tool.

Benefits to Using Affirm

According to Affirm’s internal case studies, integrating its POS financing into your ecommerce store provides a 75 percent increase in average order value, 10 percent increase in revenue per visitor, and 20 percent increase in conversions. It’s built for web payments with a mobile-first UI, although it’s also available for in-store financing as of March 2018.

Additionally, Affirm doesn’t do a “hard” credit check. Rather, it does a “soft pull” that doesn’t affect credit scores. The company also doesn’t make decisions solely on credit. The fact that a credit check isn’t the sole factor in a loan decision may open up higher ticket sales to online customers that don’t have credit cards due to poor credit or that have low limits on their cards.

As a business, you may be wondering if you get your money in installments as the customer makes payments. The good news is that Affirm pays you upfront and the customer repays Affirm.

Once the charge shows as “captured” in the backend, you’ll receive your payment from Affirm, and the customer starts making their monthly payments to them. In the event of a dispute, Affirm holds the payment from the business until the dispute is resolved.

Integrating Affirm with Your Website

Affirm integrates with your existing payment gateway to provide a secondary payment option within the shopping cart.

In the below example from Casper, underneath the checkout button for the estimated $995.00 total is a link stating, “As low as $56/month at 0% APR.” Clicking that link shows a pop-up explaining the simplified terms of Affirm’s payment structure and directing customers to select Affirm at checkout.

Affirm loans example

When a customer does this, they’ll be redirected to Affirm’s website, where they fill out basic information like name, phone number, address, income, and bank account information.

As mentioned earlier, Affirm doesn’t do “hard” credit checks (although it does report payments to Experian) though it does do a “soft” pull that doesn’t affect a consumer’s score. Instead, it uses data science to analyze historical payment history and bank activity to provide instant approval or denial. In some cases, a customer may be asked to make a down payment.

What Platforms Does Affirm Work With?

Affirm is partnered with many major online payment platforms, including Shopify, Magento, BigCommerce, WooCommerce, 3dcart, Salesforce, Zencart, and more.

It maintains a list of API docs on its website for front-end developers to install the necessary scripts to create the scenario listed above. This includes showing installment monthly pricing underneath product pricing, in-cart messaging, authorization, and order management integration.

Affirm’s “Merchant Success team” is available via email to assist with any issues setting up the program. In addition, they can answer any questions related to staff training or integrating Affirm into existing marketing channels.

If you’d like to see Affirm in action, there’s a demo available here.

Getting started is as easy as visiting the Affirm website and choosing your payment platform. The site will walk you through the rest of the information you need to know.

Regardless of whether you integrate Affirm into your site, customers may make purchases using the consumer-facing Affirm mobile app. This is done using network-branded one-time use virtual cards which include a card number, expiration date, and three-digit security code. In this case, it’s processed like any other credit card transaction.

What are the Alternatives?

Affirm isn’t the only POS financing option available for short-term consumer loans. Here are a few other options:

LendingUSA – LendingUSA provides POS loans between $1,000 and $35,000 for businesses in the elective medical or consumer services industry with an 8 percent origination fee.

FinanceIt – FinanceIt provides POS loans up to $10,000 for both online and brick-and-mortar businesses. It does not charge merchant processing fees.

Lending Point Merchant Solutions – Lending Point (formerly LoanHero) provides POS loans from $1,000-$25,000 with transaction fees as low as 1 percent for larger customers.

PayPal CreditPayPal Credit offers up to $10,000 in credit to consumers and allows businesses to accept PayPal for a base rate of 2.9% plus $0.30 per transaction.

Conclusion

Short term point of sale loans are an alternative to credit cards for consumers who don’t like (or don’t qualify for) them. Studies have shown that Millennials are less likely to carry credit cards then previous generations. If they do have one, it’s often a prepaid debit card.

If your business caters to younger demographics, offering short term purchase loans, along with displaying the finance rates for larger purchases, could increase sales.

Have you used Affirm or another point of sale financing company? Would you recommend it? Let us know in the comments!

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Ellen Cunningham contributed to this article.

 

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Brian Penny

BY Brian Penny

Brian Penny is a former business analyst and operations manager at Countrywide and Bank of America turned whistleblower and freelance writer. His banking career also included jobs for Chase, American Express, and client work for Wells Fargo and other large banks. He's interested in all things finance, and spends much of his time for CardFellow writing about financial technology and payment security.In addition to CardFellow, you can find Penny's blogs on Huffington Post, Forbes, Fast Company, The Street, Cracked, High Times, Quicken's Small Business Resource, and Small Business Daily.

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